No bricks, no mortar, not really big safe

What can’t be done online? People can hold meetings, shop for gifts, send flowers, order pizza and check stock quotes online.

As the Internet continues to become more of a tool and less of a cultural phenomenon, more people are opening checking, individual retirement accounts and business accounts with Internet-only banks. There are no customer service representatives to meet with and no lines to wait in. In fact, there are no physical branches to visit when banking with an Internet bank.

With many brick and mortar banks like U.S. Bank, Bank One, Wells Fargo and Bank of America offering services online, customers are starting to check account information online and pay bills without getting out of their pajamas. But with Internet banks, absolutely everything is handled in cyberspace and over the telephone.

About 30 percent of all bank customers never set foot in their bank branches, said Rich Jeffers, a spokesperson for Net Bank. Net Bank is an Internet-only bank founded in 1996. The bank has more than 150,000 retail customers, including about 2,300 customers in Colorado, Jeffers said. “We’ve experienced double-digit company growth every year since the company was founded,” he said. Net Bank more than $2.6 billion in deposits, Jeffers said.

Since all banking with Net Bank is done electronically, there is no need for physical branches, or the associated overhead costs. “If you’re not using a bank branch, why are you paying for a bank branch?” Jeffers asked. Net Bank, he said, is able to offer higher interest rates, which essentially puts more cash in their customers’ wallets. “Depending on the product, our rates are up to five times more than the national average,” he said. They annual percentage yield on the bank’s SuperValue Checking is 1.50 percent, compared with the national average of 0.28 percent according to the www.netbank.com Website.

First Internet Bank of Indiana also extends higher interest rates to its customers with checking accounts. The annual percentage yield for interest checking at First Internet Bank of Indiana is 1.06 percent compared to the national average of 0.34 percent APY according to the www.firstib.com Website. “We are coming up on our sixth anniversary,” said Nicole Lorch, vice president of marketing for First Internet Bank of Indiana. The bank was founded in February 1999 and has expanded to serve customers in all 50 states. “Since that time, we’ve grown to about $400 million and just under 35,000 customers,” she said. The bank has 387 customers in Colorado, Lorch said.

With banking and Internet activity in general, the issue of security inevitably comes to the forefront. Both Net Bank and First Internet Bank of Indiana are Federal Deposit Insurance Corp. insured, but some folks might wonder – where is the money? All funds, Jeffers said, are transacted through the Federal Reserve.

The Better Business Bureau, in conjunction with Javelin Strategy and Research, conducted a survey on the safety of Internet banking. While the survey did not examine Internet-only banking, James Van Dyke, founder of Javelin, said banking online is remarkably safe. Most identity fraud, 62.8 percent, occurs off-line, Van Dyke said. Only 11.6 percent comes from online access sources. The percentage doesn’t add up to 100 because the remaining people are not aware that their identities have been stolen, he said.

“Many identity fraud victims can tell you about the ramifications of the crime, but they can’t tell you how their identity was stolen,” Van Dyke said. By having paper bank statements mailed to their homes and offices, most people are at a higher risk of identity fraud than those who do not receive hard statements. “The paper documents and the outgoing and ingoing checks are so much easier for people to get at than anything in an encrypted server,” he said.

Internet banks encourage their customers to decline paper statements that could potentially be snatched out of mailboxes. “They (Internet banks) tend to be a little more aggressive that their customers shut off paper statements,” Van Dyke said. He said that only 44 percent of leading banks in the United States allow their customers to shut off paper statements. “And that number should absolutely be 100 percent.”

On Feb. 11, the FDIC held its Identity Theft Symposium as part of National Consumer Protection Week (Feb. 6-12). The symposium was titled “Fighting Back Against Phishing and Account Hijacking.” When online, people may receive e-mail which seems to come from financial institutions or government agencies. The fraudulent “phishing” e-mails ask respondents to resubmit or verify confidential information, including Social Security numbers and passwords. Once information is provided to a fraudulent entity, the sender can work to access financial and identification information.

“Security is an issue no matter what sort of an institution you’re talking about,” said Clyde Reid of the FDIC office of public affairs. People can “spoof” a bank’s Website, he said, and it doesn’t matter if the bank is traditional or Internet-only.

“We say identity fraud is a sprint, not a marathon,” Van Dyke said. Criminals try to commit as much fraud as possible before they are caught. With online banking (both with brick and mortar institutions and Internet-only banks) customers can check their account information as often as they’d like, making it more difficult for fraudulent purchases to go unnoticed.

The average dollar amount for fraudulent activity detected by someone through electronic means is $551. This pales in comparison to the average $4,543 in fraud discovered by a person using paper account statements, Van Dyke said.

On July 9, 2004, the FDIC reported that Internet banks “under perform ‘brick-and-mortar’ banks” in a document titled “Bank Branching Trends and Prospects of Key Banking Sectors.” Internet banks, the document stated, cannot facilitate the “building of long-term relationships” with small business borrowers.

“There are no Internet banks in Colorado,” said Richard Fulkerson, commissioner of the Colorado Division of Banking. (Net Bank is based in Atlanta and First Internet Bank of Indiana in Indianapolis.) “Internet-only banking is very rare in the U.S.,” he said. Because all banking activity is handled electronically with these institutions, there is no in-person contact. “It’s just that I think people take a certain amount of comfort in walking into a branch if they have a problem.”

But that does not seem to hold true for Net Bank small business customers, said Bert Davis, director of small business banking. “When we’ve talked to our customers they say they don’t want to stand in line and wait for 45 minutes to make a deposit if they don’t have to,” Davis said. Higher interest rates on money market accounts also are available to small business customers, Davis said. The standard business money market account at Net Bank “pays about three times the national average,” according to the bank’s Website.

Both Net Bank and First Internet Bank of Indiana employ customer service representatives who can assist customers with their queries. Of the 30 full-time employees at First Internet Bank of Indiana, 10 are customer service representatives, Lorch said.

“There’s no pushing people from one department to the next to get a question answered,” she said. “There’s a good chance that when a customer calls in, they probably know the person they’re talking to.” The only drawback to Internet-only banking Lorch can see is one of logistics. “We haven’t figured out a way to spit cash out of your floppy drive.”

- Stephanie.Cline@csbj.com

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